How rebalancing can boost your wealth - MoneyWeek Investment Tutorials

one of the things that investors should do but often don't is the obvious one they should be buying low and selling high that way you make a profit the problem is plenty of studies show that what investors tend to do especially retail investors is the exact opposite it's not always their fault but they tend to be drawn into buying high and selling low and obviously that's not a good way to make a profit so for the last video of 2012 I want to cover a simple way you can help yourself to avoid exactly that problem the problem of selling low and buying high when what you want to be doing is buying low and selling high and it's called rebalancing your portfolio and it's something that you ought to think about doing on a regular basis so I'm gonna cover in simple terms what rebalancing is I'll leave you with a thought about how to go about it so rebalancing is this sort of idea imagine you've set up a simple portfolio now the asset allocations I'm about to give you I'm not going to cover how you get them that would fill five or six more videos and assume you've already arrived at your preferred asset allocations what I mean by that is you've decided for argument's sake the shares will make up 50% of your portfolio bonds okay could be a mixture of government and corporate will make up let's say thirty percent of your portfolio alright and then because you like to keep a little bit of firepower back you've got cash at ten percent and you're also happy to invest in one or two what might be called alternatives okay perhaps you like a little bit of gold in your portfolio so that's ten percent all right now they're all adds up to 100 percent and there are already a few things missing some of you might be saying where's property well I'm going to make an assumption that if you've got a property a house for example even with a mortgage you've got some equity property you're already exposed property so this is your investment portfolio excluding the house let's say that you live in alright I'm one or two of you might say what about buy-to-let what about this what about that but the point is not the asset allocation it is or what should you do when it changes that's the subject of this video is called rebalancing grow very simple idea alright it does help you to avoid the problem of piling into assets when they're expensive okay and dumping them potentially when they're cheap when you should be doing the exact opposite so let's say there's your asset allocation fifteen thirty ten and ten and what happens is very simple a year later you look at your portfolio and you find but actually shares about a good year so they now make up 60% of your portfolio bonds had a bad year and they now make up 20% of your portfolio let's say around 10% still in cash okay cash has good optionality it enables you to take advantage of opportunities it's also a buffer if things go wrong and alternatives have stayed roughly around 10% now you could just say so what 60 plus 20 plus 10 plus 10 is still a hundred or what you point him well the point is is all right shares presumably have gone up in value bonds have gone down in value now here's the point here's the point about good contrarian investing principles is that you know you want to be adjusting your portfolio ideally back roughly to your target allocation which will have the benefit of meaning you will buy some bonds when they're cheap sell some equities when they're maybe getting expensive and maintain your target waiting so very very simply rebalancing is just saying I want to get back to an allocation of fifty thirty ten and ten so what I need to do is sell okay to get back to my allocation of fifty percent shares and put the proceeds into my bond portfolio whether that's invested in funds or directly one by one if it's big enough okay so you literally sell something of shares buy some bombs get yourself back around to it's not always possible to be bang on with these things to around the original 50% there and the original 30% there okay now how often should you do this exercise there's no obvious drawback right the drawback is it costs money alright if you do this too often any benefit you get from rebalancing the portfolio will be fretted away in transaction costs dealing cost bit office breads you're buying shares stamp duty and the like okay so I'd recommend that once a year the most retail investors unless the mark is incredibly volatile is often enough because you only get the benefits of rebalancing pocketing a little bit of profit on your shares buying bonds when they've dropped in value and got cheaper that's good contrarian principles be done a bit too often because any gain that you make would just be not with charges fees taxes and so on and when you apply it okay well I've said once a year you could apply it both on this sort of macro big picture level but also within your share portfolio if you've got a share in here okay that's that's a runaway success you want to be looking at that share and saying well maybe it's time to rebalance so maybe you've got ten shares in there each comprising you know 10% of your equity allocation one of them's you know doubled over the last 12 months maybe that's the one you want to trim and reinvest in other shares in the portfolio okay well take that money off the table and reinvest it in bonds so you can do rebalancing of two levels this would a portfolio level and then within okay the allocation that you're looking at alright so there it is very very basic rebalancing those people looking for videos on asset allocation and some hints on asset allocation which is where this all begins could maybe take a look at the money week basics email series by clicking the link below this video ok and I want to finish this week just by mentioning because it's Christmas a couple of Christmas quiz challenges which I'll answer in the first video of the new year here they are in this week's edition of money week you'll find a Christmas quiz okay and one of the questions in it is as follows so subscribers will be able to get the answer before everyone else who watches the video next year who was Norman Lamont's special economic advisor around the time Britain was kicked out of the AR n and question number two is can you put nine dots down in a square so grab a piece of paper grab a napkin over the Christmas table okay and throw yourself nine dots like that they should be in a square by the way a slot perfect square then here's your challenge very simple can you connect all nine dots using four straight lines without removing your pen from the paper and without doubling back on yourself so that isn't allowed because that's removing your pen from the paper so there it is the ninth challenge can you connect all nine dots using just four straight lines once your pen goes down its got to stay down and you can't double back any the answer will be given in the first quiz of a new year in the meantime have a very happy Christmas to download this free video to your favorite mobile device find us on iTunes by searching for money week and the entire video archive is also available free just visit Manu eat calm

Channel: MoneyWeek

Views: 19,279

Rating: 4.8543048 out of 5

Keywords: Rebalancing, what is rebalancing, Asset allocation, Portfolio weighting, How to boost your wealth, Portfolio management, Fed model, US stockmarket, US Treasury yield, Are stocks a buy?, Earnings yield, EdYardini, ratios, losses, inflation, bank, payments, claims, successful, Dividend, stocks/shares, Overtrading, profit, loss, Bid, offer, spreads, Currency, credit, Trading, Trade, Tax, trade, economy, whiteboard, tim bennett, Banking, profits, Accounting, tricks, America, banks, Asset, Purchase, Reverse, QE

Id: ak-yv2yVevs

Length: 8min 28sec (508 seconds)

Published: Wed Dec 19 2012